MARKET WATCH: Energy prices down after 1-day rebound

Energy prices on May 19 ended a 1-day rebound, giving back some of the gains from the previous session amid weaker US economic data and a shrunken Japanese economy for the first quarter due to the Mar. 11 earthquake and tsunami.

Sam Fletcher
OGJ Senior Writer

HOUSTON, May 20 -- Energy prices on May 19 ended a 1-day rebound, giving back some of the gains from the previous session amid weaker US economic data and a shrunken Japanese economy for the first quarter due to the Mar. 11 earthquake and tsunami.

“The oil market is torn between continuously tightening [supplies] and signs of weakness in the US recovery,” said James Zhang at Standard New York Securities Inc., the Standard Bank Group. “For now, US economic health has become one of the biggest risks to the oil market,” he said. “Hence, the sentiment of the oil market is likely to be biased on the cautious side while awaiting clearer signs” of US recovery.

“Despite the US weekly jobless claim number beating expectations, [it] remained above 400,000 [new claims],” said Olivier Jakob at Petromatrix, Zug, Switzerland. US existing home sales were down and the Philadelphia Federal Reserve Bank survey “disappointed.” Consequently, the oil market weakened “despite a softer dollar” as the euro gained from the weak US economic data, he said.

June contracts for reformulated blend stock for gasoline (RBOB) and for heating oil weakened by 1% and 0.4%, respectively, May 19 in the New York market. “Term structures for West Texas Intermediate also softened, while North Sea Brent’s term structure remained broadly unchanged,” Zhang said.

Natural gas fell 3% as the Energy Information Administration reported the largest injection so far this year in US underground storage—92 bcf in the week ended May 13, above the Wall Street consensus for a 90 bcf injection. That increased working gas in storage above 1.9 tcf. Stocks were down 235 bcf from a year ago and 36 bcf below the 5-year average.

“We are skeptical that gas operators will drop enough rigs to meaningfully impact US supply,” said analysts in the Houston office of Raymond James & Associates Inc. The price of crude was up while that of gas was down in early trading May 20.

Japanese, US problems
Japan’s first-quarter gross domestic product was down 3.7%, “much lower than the expected [decline of] 1.9%,” Zhang reported. “Japan’s JX Nippon Oil & Energy Co. announced today…plans to restart its 250,000 b/d Kashima refinery in early June. The refinery has been shut since March due to damage caused by the earthquake. The restart could help with the middle distillate supply in the Asia-Pacific region.”

He also noted the Japanese government allowed its temporary relaxation of oil refiners’ reserve requirements to expire. “The relaxation was implemented to ease the impact on oil supply from the earthquake. The expiry means that refiners must build their inventories to cover the 70 days of demand as per the reserve requirement. Although data is not available on how much oil is required to meet the reserve requirement, it could provide some support on the demand side,” said Zhang.

In the US, meanwhile, Jakob said, “For the summer, gasoline is now trading below heating oil, and this is not good news at all for US refiners. If gasoline is now cheaper than heating oil, heating oil is not strong enough (as in 2008) to carry the 3-2-1 crack.”

US refineries are running at low capacity due to lack of demand, and “the low rates are not even enough to maintain the processing margins,” said Jakob. “At the current levels of cracks, we expect the US refineries to start thinking about cutting runs for economic reasons. If they fear doing this for the risk of political backlash, then they will have to digest the fall of the processing margins. We do not want to be long shares of US refineries given the current processing economics and the upcoming evidence of oil demand destruction.”

Jakob added, “Obviously, low refinery runs also translate in low crude oil demand. There are a few forest fires in Canada disrupting production, but US demand for crude oil is not strong enough to make it a serious line of concern. In the meantime the International Energy Agency [in Paris] has been pushing with two hands the panic button as they are starting to receive more demand data, and they know the upcoming revisions they will have to make to the demand side.”

Adam Sieminski, chief energy economist, Deutsche Bank AG, Washington, said, “With global GDP under some downward pressure, consensus oil demand growth forecasts are now hovering near 1.4 million b/d for 2011. In our view, it is still possible that the actual will come in above this level.”

He reported, “Growing concerns about power shortages in China have potentially bullish ramifications for the gas oil balance as China may revert to a net diesel importer in the second quarter. The [Chinese government] policy response has been to ban diesel exports and issue sizable import quotas. In our view, this should prove supportive for regional gas oil.”

Sieminski said, “With most analysts forecasting gas prices to remain below $6/MMbtu over the next few years, the incentive to move quickly on LNG exports is high, and we expect effort to speed-up export proposals.”

Energy prices
The June contract for benchmark US light, sweet crudes fell $1.66 to $98.44/bbl May 19 on the New York Mercantile Exchange. That contract expires at the end of regular trading May 20. The July contract dropped $1.63 to $98.93/bbl. On the US spot market, WTI at Cushing, Okla., was down $1.66 to $98.44/bbl.

Heating oil for June delivery declined 1.12¢ to $2.89/gal on NYMEX. RBOB for the same month decreased 2.95¢ to $2.93/gal.

The June natural gas contract lost 10.4¢ to $4.09/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., continued to fall, down 7¢—the same amount it lost in the previous session—to $4.06/MMbtu.

In London, the July IPE contract for North Sea Brent crude dropped 88¢ to $111.42/bbl. Gas oil for June continued to climb, however, up $3 to $917.75/tonne.

The average price for the Organization of Petroleum Exporting Countries' basket of 12 reference crudes increased 48¢ to $107.88/bbl.

Contact Sam Fletcher at samf@ogjonline.com.

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